Campaign Contributions in Bitcoins?

Bitcoin has ushered in a new era of campaign finance and the FEC is scrambling to catch up. Interest in Bitcoin is increasing among political organizations and politicians who see it as a potential cash cow. Last month, the Conservative Action Fund (PAC) requested that the FEC weigh in on whether they could accept Bitcoins as campaign contributions. Some minor party candidates are already accepting Bitcoin donations and expect them to rise in the 2014 elections.

Bitcoin is currently under scrutiny in the Senate and by a number of federal regulatory agencies. The IRS has not officially classified Bitcoin as a currency, but a federal judge ruled in August that it meets all the requirements. In light of the recent court decision, Bitcoin has drawn increased attention from lawmakers and government agencies interested in understanding the virtual currency.

Sometimes referred to as a “libertarian’s dream”, Bitcoin provides protection from common disadvantages of real currency, like inflation, and affords a higher level of privacy and security from hackers. Bitcoins are highly decentralized, not backed by any institution or circulated by banks, but discreetly transferred through secure servers. They can be traded, bartered, or sold for real money.

Opponents worry that Bitcoin will be misused by criminals. The Chairman of the Bitcoin Foundation’s Regulatory Affairs Committee explained that Bitcoin, unlike more centralized virtual currencies, is not as appealing for money laundering or other illegal activity. Because Bitcoin keeps a public record of all transactions, although only available to Bitcoin users, it deters illicit behavior because it is not completely anonymous.

Nonetheless, the government still has an incentive to regulate Bitcoin to collect tax revenue, not an easy feat. Several layers of encryption help to protect user identities, making it nearly impossible to track who has bought what, and the amount of tax owed. Although tax evasion undoubtedly occurs with Bitcoin purchases, trying to audit every Bitcoin user to collect revenue would likely cost the IRS more than they could ever recoup.

But if the FEC determines that Bitcoins can be contributed to campaigns, regulation is unavoidable. Providing Bitcoin with legitimacy would raise infinitely more questions for regulatory agencies to come up with answers for. Defining Bitcoin political contributions would be an even more arduous task. Is Bitcoin actually a currency? Will Bitcoin contributions be monetary or in-kind? How would Bitcoins be valued? Regardless of the FEC decision, the feds will likely pursue Bitcoin regulation even if it is unfruitful.